Microeconomics Final Exam Questions
Course Introduction
Microeconomics is the branch of economics that studies the behavior and decision-making processes of individual households, firms, and industries in the allocation of limited resources. This course examines fundamental concepts such as supply and demand, market equilibrium, consumer choice, production costs, and market structures, including perfect competition, monopoly, oligopoly, and monopolistic competition. Through theoretical models and real-world applications, students will gain an understanding of how prices are determined in markets, how consumers and producers interact, and how these interactions shape the allocation of resources and the distribution of goods and services in the economy.
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Microeconomics Theory and Applications 12th Edition by Edgar K. Browning
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Chapter 1: An Introduction to Microeconomics
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Q1) Choosing a combination of goods represented by a point inside the production possibilities frontier indicates:
A)that resources are not scarce.
B)that resources are scarce.
C)rational behavior.
D)irrational behavior.
Answer: D
Q2) When analyzing events across time,economists measure consumer behavior based on:
A)nominal prices.
B)real prices.
C)complete information about buyer preferences.
D)current income.
Answer: B
Q3) Which of the following is an assumption usually made about markets and market participants by economists?
A)Market participants are interested in maximizing social welfare.
B)Market participants are generally altruistic.
C)Market participants engage in irrational behavior.
D)Market participants confront scarce resources.
Answer: D
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Chapter 2: Supply and Demand
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Q1) Which of the following is likely to shift the demand for chocolates to the left?
A)An increase in the price of cocoa used to make chocolates
B)Medical reports suggesting increased risk of memory loss among the aged due to high chocolate consumption
C)A decrease in the price of chocolates
D)The introduction of minimum wages by the government in an attempt to improve the average wage level in the economy and alleviate poverty
Answer: B
Q2) Which of the following violates the law of demand?
A)After receiving an annual raise of $10,000,a young man buys more steak than before,even though the price of steak increased by 5 percent.
B)A woman with a small baby continues to purchase diapers even after the price of diapers went up.
C)After the price of bowling increases,a woman increases her frequency of bowling.
D)Despite butter being more expensive than margarine,a woman buys more butter after the price of margarine (a close substitute)increases.
Answer: C
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Chapter 3: The Theory of Consumer Choice
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Q1) Suppose a consumer must pay $P per visit to the local museum for each of the first 5 visits but $2P per visit from the 6<sup>th</sup> visit on.With a composite consumption good on the Y-axis and visits to the museum on the X-axis,the budget line:
A)is vertical after 5 visits.
B)becomes steeper after 5 visits.
C)becomes flatter after 5 visits.
D)shifts outward after 5 visits.
Answer: B
Q2) Define a normal good and an inferior good and give an example of each.
Answer: A normal good is one which a consumer buys more of when his or her income rises,ceteris paribus (that is holding prices,preferences and other determinants of demand constant).An inferior good is a good which a consumer buys less of when his or her income rises,ceteris paribus.Apples are normal if consumption increases as one's income rises.For example,macaroni and cheese could be an inferior good for some college students.After they graduate and get a great job with higher income,they purchase less macaroni and cheese and move up to sushi.Note that a good which is normal for one person can be inferior for another.
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Chapter 4: Individual and Market Demand
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Q1) The income effect of a price change:
A)is always larger than the substitution effect in the inferior good case.
B)produces a backward-bending income-consumption curve.
C)reinforces the substitution effect in the normal good case.
D)is always positive.
Q2) Assume that as the price of good X rises,the demand for good Z shifts outward.On the basis of this information we can conclude that:
A)good Z is inferior.
B)goods X and Z are complements.
C)goods X and Z are substitutes.
D)good X is an input used in the production of Z.
Q3) U = C<sup>\(\alpha\)</sup>M<sup>\(\alpha\)-1</sup> is an example of a:
A)Cobb-Douglas production function.
B)Cobb-Douglas utility function.
C)quadratic utility function.
D)quadratic production function.
Q4) A consumer's demand function for a good Q is of the form P = 20 - 2Q.Derive the consumer's price elasticity of demand for this good when price decreases to $6 from $8.What can be inferred about the shape of the consumer's price consumption curve?
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Chapter 5: Using Consumer Choice Theory
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Q1) Compared to an equal-cost cash grant,an excise subsidy on clothing results in the purchase of:
A)more clothing and more of other goods.
B)less clothing and more of other goods.
C)more clothing and less of other goods.
D)less clothing and less of other goods.
Q2) Suppose Microsoft stock will provide either a return of 10 or 20 percent over the next year and that the probability of the former outcome is 0.25 while the probability of the latter is 0.75.The expected return on Microsoft stock over the next year is thus _____%.
A)15
B)12.5
C)17.5
D)20
Q3) In the intertemporal consumer choice model,an increase in _____ will alter the slope of the budget line.
A)saving
B)the interest rate
C)future income
D)borrowing
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Chapter 6: Exchange, Efficiency, and Prices
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Q1) When the marginal rates of substitution differ,then:
A)mutually beneficial trade is not possible.
B)the only way to make one consumer better off is to make the other worse off.
C)it is impossible to find a point that makes both worse off.
D)indifference curves intersect inside the Edgeworth box.
Q2) Suppose,given their initial endowments of milk [M] and cookies [C],we know that Ashley's marginal rate of substitution of cookies for milk [MRS<sub>CM</sub>] = 3M/6C,Bill's MRS<sub>CM</sub> = 8M/8C,and Carol's MRS<sub>CM</sub> = 5M/10C.Given this information we know that a mutually beneficial trade does not exist between:
A)Ashley and Carol or between Ashley and Bill.
B)Ashley and Bill,but it does exist between Ashley and Carol.
C)Ashley and Carol,but it does exist between Carol and Bill.
D)any of the three individuals.
Q3) Why is it difficult to compare two efficient points and decide which one is better?
A)The Pareto efficiency criterion cannot be applied to more than one allocation.
B)Interpersonal comparisons cannot be made scientifically.
C)The criteria for efficiency are subjective.
D)There is no difference between various efficient allocations.
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Chapter 7: Production
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Q1) A firm that is operating in a technologically inefficient way:
A)is getting the maximum output from its inputs.
B)is making zero economic profits.
C)is not making as much money as it potentially can.
D)should shut down immediately to reduce its losses.
Q2) A carpenter hammers nails each day at work.The average number of nails hammered over the first three hours is 50,and the marginal product of the fourth and fifth hours of work is 40 and 20 nails,respectively.The total output after five hours work is _____ nails.
A)150
B)110
C)210
D)60
Q3) A production function that exhibits constant returns to scale is called a(n):
A)linear homogeneous production function.
B)Cobb-Douglas production function.
C)quadratic production function.
D)a linear production function.
Q4) Define and then derive the expression for the marginal rate of technical substitution.
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Chapter 8: The Cost of Production
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Q1) A total product curve whose slope is continually rising at an increasing rate:
A)indicates that an infinite amount of labor is needed to produce a given level of output.
B)does not reflect diminishing marginal returns.
C)does not reflect increasing marginal returns.
D)describes a production function where labor is the only input.
Q2) Which of the following is correct?
A)Total Fixed Cost = Total Cost + Total Variable Cost
B)Total Cost = Total Variable Cost + Marginal Cost
C)Average Fixed Cost = Average Total Cost - Average Variable Cost
D)Average Total Cost = Marginal Cost + Average Fixed Cost
Q3) Which of the following can be classified as an implicit cost of production?
A)The cost of raw materials
B)Rent forgone on the office building
C)Interest paid on debt
D)Salary paid to workers
Q4) Explain why the long-run average cost curve is usually U-shaped although all inputs are variable in the long run?
Q5) Do you think the marginal cost curve of a petroleum refinery will be U-shaped? Explain your answer.
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Chapter 9: Profit Maximization in Perfectly Competitive Markets
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Q1) The perfectly competitive firm minimizes losses by shutting down whenever:
A)price is below average fixed costs.
B)price is below the minimum point of the average cost curve.
C)total variable costs are greater than total fixed costs.
D)price is below the minimum point of the average variable cost curve.
Q2) A perfectly competitive firm is a price taker.This implies that:
A)price does not change in a perfectly competitive market.
B)price is not determined by supply and demand in a competitive market.
C)price only changes when market conditions change.
D)output of a firm is the only factor that can change prices.
Q3) Refer to Figure 9-4.The total revenue for the firm at the output level OB is _____.
A)OVTB
B)OSGB
C)OPKB
D)GTVS
Q4) Derive the first-order and second-order conditions for perfect competition.
Q5) Explain the difference between diminishing marginal returns to factor and a decreasing-cost industry.
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Chapter 10: Using the Competitive Model
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Q1) The Civil Aeronautics Board (CAB).allowed airlines to charge prices above the equilibrium price.Even then the airlines were not profitable because:
A)their economic profits were zero.
B)nonprice competition between the airlines raised costs and eroded profits.
C)the demand was too low to make profit.
D)they were subject to heavy taxes by the government which drove down profits.
Q2) Suppose the demand for ice cream sundaes can be represented by the equation Q<sub>D</sub> = 10 - P,and the supply is given by the equation Q<sub>S</sub> = P.Which of the following is the best estimate of the producer surplus in this market?
A)$5
B)$10
C)$12.5
D)$22.5
Q3) When the efficient rate of output is produced in the short run:
A)marginal cost is greater than marginal benefit.
B)the producer surplus is as large as possible.
C)the total surplus is as large as possible.
D)marginal benefit is greater than marginal cost.
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Chapter 11: Monopoly
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Q1) Answer the following:
a)Define the market for Coca-Cola,that is,what would you include in the market for Coca-Cola? Considering the market for Coca-Cola,how is the market power of Coca-Cola affected by what is included as a part of the market?
(b)Explain how cross-price elasticity of demand is relevant to a firm being investigated for antitrust violation.If you were the chief economist for this firm,would you want to show a high cross-price elasticity or a low cross price elasticity of demand between your product and a rival product? Why?
Q2) Explain why a profit-maximizing monopolist will always sell at a price where demand is elastic.
Q3) Based on Figure 11-1,competitive firms will receive producer surplus equal to area: A)ACFH.
B)EIF.
C)AVF.
D)AWEH.
Q4) Given the profit function = R - C,derive a monopolist's profit-maximizing price and quantity.
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Chapter 12: Product Pricing With Monopoly Power
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Q1) Which of the following price discrimination strategies allows a monopolist to distribute a product/service most efficiently between two periods of time?
A)Predatory pricing
B)Peak-load pricing
C)Block pricing
D)Two-part tariff
Q2) Consider a profit-maximizing monopolist whose consumers have identical demand curves.Which of the following will be true if the firm employs a two-part tariff pricing strategy for these consumers?
A)The firm will produce less output compared to a firm that is not using this pricing strategy.
B)The firm will capture the entire consumer surplus.
C)The firm will charge a tariff that also maximizes revenues.
D)The firm will charge consumers a different entry fee,but a constant per-unit price.
Q3) Why is it difficult to implement first-degree price discrimination?
Q4) What is peak-load pricing and why is it advantageous compared to charging a single price?
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Chapter 13: Monopolistic Competition and Oligopoly
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Q1) Which of the following is a defining characteristic of an oligopoly?
A)A large number of sellers
B)Mutual interdependence between firms
C)Economies of scale in production
D)A large number of buyers
Q2) When a firm in a monopolistically competitive market is operating at excess capacity it implies that:
A)it is producing the efficient level of output.
B)it is producing more than the competitive level of output
C)it can produce output at a lower cost
D)it is facing an upward-sloping average cost curve
Q3) Unlike a perfectly competitive firm,a monopolistically competitive firm:
A)makes zero economic profits in the short run.
B)caters to a large portion of the market.
C)does not face barriers to entry and exit.
D)sells a differentiated product.
Q4) Amazon.com®,Starbucks®,and eBay® are all examples of firms that were the first to establish their presence in their respective markets.Would you consider any of these firms to be dominant in that they set the market price and other firms act as perfectly competitive firms using this market price?
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Chapter 14: Game Theory and the Economics of Information
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Q1) A buildup of nuclear weapons between two or more nations appears both counterproductive and counterintuitive.But one theory,Mutually Assured Destruction,argues that it is to a nation's benefit to amass an arsenal of weapons so vast that their use could destroy the whole world.Using a prisoner's dilemma matrix with a Nash equilibrium,show how that Country A choosing a strategy of spending vast amounts on nuclear weaponry (call it "High"),enough to destroy all of society,rather than a smaller amount (call it "Low),sufficient for self-defense only,is a dominant strategy and a deterrent over Country B.
Q2) Which of the following is the best explains the moral hazard problem?
A)Chronically ill people are more likely to purchase health care insurance.
B)Only owners of poor quality used cares put them up for sale.
C)People who are highly risk-averse are less likely to invest in the stock market.
D)Drivers with airbags in their cars drive a little more recklessly.
Q3) Given the information in Table 14-2,which firm has a dominant strategy?
A)Firm A
B)Firm B
C)Both Firm A and Firm B
D)Neither Firm A nor Firm B
Q4) What is a prisoner's dilemma? Draw a payoff matrix which illustrates this game.
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Chapter 15: Using Noncompetitive Market Models
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Q1) Refer to Table 15-2.Which of the following is true?
A)Company A's dominant strategy is to set a high price.
B)Company A's dominant strategy is to set a medium price.
C)Company A's dominant strategy is to set a low price.
D)Company A does not have a dominant strategy.
Q2) Which of the following,if true,is the best example of a natural monopoly?
A)The oil distribution industry where one distribution network serves the whole market
B)The pharmaceutical industry where patents form a barrier to entry
C)The beverages industry where the cost of capital is high and variable costs are low
D)The hospitality industry where variable costs are higher than fixed costs
Q3) Which of the following is true of a natural monopoly?
A)The operation of more than one firm reduces the production efficiency of the market.
B)The good that is sold by a natural monopoly is easily substitutable.
C)The firm produces at the point where marginal revenue equals price.
D)The natural monopoly market has no barriers to entry and exit.
Q4) Define and illustrate iterated dominance and commitment strategy.
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Chapter 16: Employment and Pricing of Inputs
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Q1) Which of the following is true of a competitive industry's labor demand curve?
A)The industry labor demand curve is a horizontal summation of the individual firm's demand curves for labor.
B)The industry labor demand curve is less elastic than the individual firm's demand curves for labor.
C)The industry labor demand curve is a vertical summation of the individual firm's demand curves for labor.
D)The industry demand curve shows that at a lower price,less of the input is employed in the industry.
Q2) Assume that a car manufacturing plant in a small town in Michigan in the U.S.is a monopsonist employer of heavy machinery operators.The marginal value product of labor is given by w = 1100 - 20Q where w is the wage rate and Q is the number of heavy machinery operators.The supply of heavy machinery operators is given by w = 200 + 5Q.What is the profit-maximizing level of employment and wage for the car manufacturer? Assume that the plant is perfectly competitive in the output market.
Q3) Define monopsony in an input market and graphically illustrate equilibrium employment and wages under a monopsony.
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Chapter 17: Wages, Rent, Interest, and Profit
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Q1) In Figure 17-1,assume the worker is initially in equilibrium at point A.Weekly earnings and work effort are _____ respectively.
A)OY<sub>1</sub> and OL<sub>2</sub>
B)OY<sub>2</sub> and NL<sub>2</sub>
C)OY<sub>1</sub> and NL<sub>2</sub>
D)OY<sub>2</sub> and ON
Q2) Illustrate graphically and explain the income and substitution effects of a wage decrease on hours of labor supply for the case in which the individual's labor supply curve is backward bending.Graphically derive the individual's labor supply curve.
Q3) What is meant by human capital?
A)It refers to the quantity of labor input employed in the production process.
B)It refers to the earning capacity of workers which is enhanced by education and experience.
C)It refers to the number of workers that will be required to replace one unit of capital.
D)It refers to the total number of employees working in an organization.
Q4) What are the sources of variation in wages across individuals?
Q5) How can the presence of a union in a labor market be beneficial?
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Chapter 18: Using Input Market Analysis
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Q1) Refer to Figure 18-1.Which of the following distances represents the complete unemployment created by the minimum wage legislation?
A)OL<sub>3</sub>
B)L<sub>2</sub>L<sub>3</sub>
C)L<sub>2</sub> L<sub>1</sub>
D)OL<sub>2</sub>
Q2) Which of the following facts indicate that the official wage paid by the National Collegiate Athletic Association [NCAA] to the athletes is below the market-clearing level?
A)Athletes practicing for greater number of hours before the seasonal tournaments
B)Schools awarding more athletic scholarships to the students
C)Athletes receiving cars,apartments,and cash payments
D)Athletes receiving offers for promotional advertisement campaigns
Q3) Using a graph,explain the employment effects of a binding minimum wage.Who benefits,who loses,and how large are these effects?
Q4) Explain graphically that a payroll tax imposed by the government either on the employers or on the employees will have a similar impact.
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Chapter 19: General Equilibrium Analysis and Economic Efficiency
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Q1) Which of the following is true of the points along the welfare frontier?
A)Every point along the frontier is efficient.
B)Every point along the welfare frontier shows a suboptimal allocation of resources.
C)Movements along the frontier makes one person better off without harming anyone.
D)The amount of resources available is different at different points on the welfare frontier.
Q2) An allocation of resources is inefficient if,through some feasible change in the allocation of resources:
A)it is impossible to make someone better off without making someone else worse off.
B)it is impossible to make everyone better off.
C)it is possible to make someone better off without leaving someone else worse off.
D)it is possible to make everyone better off,provided the resources are distributed equally.
Q3) What is the difference between partial and general equilibrium analysis?
Q4) Explain why economic efficiency cannot be achieved under certain circumstances.
Q5) Why is efficiency considered to be a reasonable goal for economic performance?
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Chapter 20: Public Goods and Externalities
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Q1) Which of the following aspects of the free-rider problem is overcome by government financing of a public good?
A)The problem of overproduction
B)The external cost associated with production
C)The tendency of people to withhold payment
D)The high search cost associated with the consumption of the good
Q2) In case of a good that is nonrival in consumption,the quantity of the good produced:
A)increases with the increase in consumption.
B)decreases with the increase in consumption
C)is not affected by the change in consumption.
D)is not affected by changes in the cost of production of the good.
Q3) Mention some of the situations in which the Coase Theorem will not ensure an efficient outcome?
Q4) In Figure 20-2,the efficient output is _____ than the market equilibrium output by _____ units.
A)more;300
B)less;300
C)more;100
D)less;100
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